Archive - 2011

When we predicted a few weeks ago that the US would end 2010 with $13.8 trillion in debt we miscalculated the settlement dates on all the last round of bond auctions . As a result, we are happy to announce that as of December 31, 2010, the US now has $14,025,215,218,708 and 52 cents in debt (incidentally this is an increase of $154 billion in debt on the US balance sheet overnight). As a reminder the debt ceiling is 14,294,000,000,000. Which means at a run rate of $125 billion in net monthly issuance, the US may not even get to the end of March at the current burn rate. Which also means Congress better start the discussion on raising the debt ceiling as soon as February. Which means someone is about to [win/lose] some serious cash on the Feb 28 debt ceiling hike InTrade contracts.

The futures are so bright, we have to wear shades this morning.

Those shades would be blinders, like we put on horses to keep them from being distracted by reality while they race forward...

When we last looked at the updated CAPE and q S&P valuation readings as compiled quarterly by Smithers & Co, the market was only 48% overvalued. It is therefore not surprising that following one of the most ridiculous melt ups in the past two years (and we have had many in that period) that following the firm's most recent Z1 update of the CAPE (Cyclically Adjusted PE) and Tobin q chart, the S&P is now well over 70% overpriced. This is obviously amateur hour. With the Bernanke Put having eliminated all risk and stock trading lab rats now concerned about being bumped up in a higher tax bracket, not to mention that the S&P 500 20 day historical vol just hit 39 year lows, please wake us up only when this number is in the 4 digit range.

And then there was one... correlation desk. Following Reuters news that the US government would allow 13 oil firms to restart deep-water Gulf of Mexico drilling without the new environmental review (under certain conditions), oil drops, drillers spike... and precious metals plunge. Obviously, this is just because silver extraction is so very closely tied to how deep underwater a given jack up can reach. Record correlations may have declined, but only to be replaced with correlations that no longer make absolutely any sense. This is just how ridiculous the power of Wall Street's correlation desks is now that almost nobody is trading.

It was one short week ago that a visibly emotional Ken Griffen was regaling investors with stories of his grandmother. Inbetween heartfelt recollections of childhood memories, the man who tends to be surprisingly close to the New York Fed when the Dow is not quite generating the desired wealth effect, Griffin interjected the following note on the "strength" of the Citadel team: "We begin our third decade with the strongest team that I have ever assembled. Our professionals have seen the firm through the unprecedented challenges of 2008, when many could have left for other ventures. They stayed committed to Citadel because of who we are and what we represent: an entrepreneurial, results-driven meritocracy that is changing the face of modern finance." It appears something has drastically changed in this whole "results-driven meritocracy" because over the New Year's weekend, three of the most important people at Citadel picked up and left.

The chart below, while obviously a misprint, is certainly quite amusing, and provides a serendipitous look at what may happen once HFTs have bled stocks, options, exchange traded bonds, OTC derivatives, and lastly FX, dry of all adverse selection participation. Perhaps in 5 years all we will have to look forward to are massive self-reinforcing feedback looping, momentum swings, in pretty much anything and everything (alternatively, this "print" is as good an approximation of the true state of the world economy as any, should one eliminate the monetary and fiscal crutches that have propped up the global economy for the past 2+ years). In the meantime, we await to see what the first real BDIY print of the year will be. That said, the one carryover theme from 2010 is that good is good and bad is gooder, so should the BDIY really faceplant by 27% overnight we expect a new all time high in the S&P shortly thereafter.

The last week of 2010 was not an outlier to the prevailing trend of consummate selling by insiders which has marked all of 2010. Just like in previous weeks when selling vastly outpaced buying, so the week ended December 31 was no exception on the S&P: there were three insider buys for a total of $4.3 million (including one purchase for $4.3 million by a TIMET executive, where a continuing 10b-5 program seems to be accumulating stock, while on the selling side there were 34 deals worth 81 million in notional. The bulk of the selling was in Starwood, which has seen aggressive selling for several weeks if not months now, as well as Qualcomm, Salesforce.com, Varian Medical and Abercrombie & Fitch. Unlike suspectible retail investors, insiders refuse to flip to the other side and become buyers. But what do insiders know that retail doesn't...

With an endless supply of cartoons striving to fill a niche of information lack created by the silent but deadly combination of attention deficit disorder and a fear and loathing of anything math related, below we present the latest animated explanation of how the recent transition of the American Dream (purchased entirely on credit), was virtually guaranteed to become an American Nightmare... and how this is nothing new in the grand scheme of things.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/01/11

And so the first POMO of 2011 is in the history books. Brian Sack just bought $7.79 billion worth of bonds with a maturity between 2018 and 2020. At just a 2.2 submitted toaccepted ratio, this was yet another auction in which the PDs had more than enough cash in advance, and did not need the Fed's generosity. Incidentally, Brian Sack put the most recent 10 year issuance, the PC8s of 11/15/2020, which were the auctioned off security in both November and December's reopening, on the exclusion list, and the one issued just before that, the NT3s of 2020, saw exactly zero bids confirming that even PDs need to have an apriori profit before they flip a given bond.

Hidden tax ...

Free market?

That the ECB bought E164 million in peripheral bonds in the last week is not surprising. After all, there is nobody else who would even consider buying that stuff . What is surprising is that the ECB had to buy as much as it did: while we did not see even one Morgan Stanley euro sov run in the week ended December 31, somehow Jean Claude Trichet still managed to load up on quite a few PIIGs bonds about as quietly as possible absent a dark pool in government securities. Expect this number to jump again next week as the vigilantes return from Chamonix, but are still rather shy to knock on Bernanke's door.

After construction spending printed at 0.4% on expectations of 0.2%, the ISM came in at 57, precisely in line with expectations. And as always, margin pressures remain: Price move from 69.5 to 72.5, in tune with the following comment from the survey: "Strong pressure still exists on raw material prices in almost every area. It is unclear as to whether they can get them." Oddly enough, invntories declined by -4.9%, a move that makes absolutely no sense when juxtaposed with all the other diffusion index data from December.

With the value proposition of sell-side research now completely gone, as most of it has become merely a conduit for shot gun propaganda (is there even one sell on Goldman's most recent conviction list?), third party research shops such as Credit Sights are promptly becoming the only objective and impartial sources of analytical insight.  In its January 3 market commentary Credit Sights shares the first semi-official view of the adverse consequences to the economy should the current liquidity surge from the Fed not be moderated (and with such pundits as Fred "Dynamite" Mishkin telling Bloomberg earlier today that QE3 will not come, it is guaranteed that QE3 is imminent). In a nutshell: "a rising oil price creates economic headwinds via numerous channels
particularly if the increase is sudden. A decline in disposable incomes,
reduced consumer confidence, lower levels of travel, a decline in
demand for gas-guzzling larger autos and an upward bias to inflationary
expectations are all spin off effects on the consumer of a rapid ascent
in the price of oil." Which is why as liquidity continues looking for paths of least resistance, and finds them in such places as commodities (especially now that China has all but shut down the door to importing US liquidity) it is precisely the risk of a price spike in crude that is rapidly becoming the biggest risk to the "wealth effect" derived from the continued lunacy out of the Fed.